Appointing a Receiver to Protect Value and Innocent Third Parties

The Supreme Court has said that Congress could not have written a broader lien than the federal tax lien.  In addition to the lien, Congress gave the IRS broad powers to take property through levy in IRC 6331.  We can think of these administrative powers as the superpowers bestowed upon the IRS in a Marvel Comics type analogy, yet these powers do not always work against individuals and entities with assets because of the many types of properties owned by taxpayers.

One story that I heard from a colleague when I worked for Chief Counsel that I never could quite believe was the story of a revenue officer (RO) who seized a radio station seriously delinquent in paying its taxes.  As the story was told, the day after the RO seized the station he came over the air the next morning with the farm report, because you can’t just seize and shut down a radio station or TV station because they are part of the emergency broadcast network.  Other types of property create different types of problems for the IRS.  When a nursing home stops paying its taxes and starts to pyramid employment taxes, the IRS faces a difficult choice from a collection perspective because it does not want to seize and operate the facility.  Once, many years ago, a pornography shop in Washington DC was seized for delinquent taxes.  Does the IRS want to sell the merchandise in that store? There are many ways that the property owned by the taxpayer can create significant problems for the IRS.

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In addition to the types of property that can cause problems because of its nature, sometimes taxpayers own a network of property that could have significant value that would be destroyed by a typical IRS sale.  In these situations, a question arises of how to preserve value while stopping a taxpayer from pyramiding taxes.  Sometimes the calculus is simply that shutting down the business and stopping the continued accumulation of taxes is better than the difficult task of also working to preserve asset value.  If the taxpayer is working with the IRS collection officer, usually the RO will allow the taxpayer to sell property in a way that maximizes value.  That does not always happen and usually it does not for reasons related to the personalities of the taxpayer and the RO. 

If the taxpayer essentially refuses to work with the RO and if the property holdings are complex, a difficult situation arises.  The best solution may be the use of a court process to operate and appropriately wind down the property rather than selling off assets at fire sale values.  To do this requires a structure that proves an orderly process for dealing with assets.  Bankruptcy provides one orderly process, but putting a taxpayer into involuntary bankruptcy to trigger this process and obtain the appointment of a trustee is not easy and arguably is not appropriate action for the IRS.  The appointment of a receiver provides another solution but finding an appropriate receiver for the type of business(es) involved, getting the receiver appointed, and managing the receiver are difficult processes and not ones that the average IRS collection employee possesses or the attorneys in Chief Counsel, IRS or the Department of Justice Tax Division.  As a result, the IRS rarely uses the remedy of receivership even though it might provide a good solution for maximizing property values or protecting third parties who have entered into contracts with the delinquent taxpayer.

I had a front row seat to the creation and management of a receivership over several years by working in the office next to John McDougal.  I know from the case on which he worked the skill that was necessary for him to succeed in obtaining a receiver and maximizing the return from the receiver’s work.  I remember the day when tenants in one of the properties taken over by the receiver were calling John because of a serious sewer problem at the apartment complex.

With this background I saw with interest a new case in which a receiver was appointed, United States v. Scherer, No. 2:19-cv-03634 (S.D. Ohio April 5, 2021).  The very first line of the case provided a great clue regarding a reason for appointing a receiver:

On December 16, 2005, the United States Government made assessments of federal income taxes against Defendant Ronald E. Scherer for unpaid amounts during tax years 1990, 1991, and 1992. (ECF No. 76 at 10).

The next line provided another great clue in putting together the picture for why the IRS needed a receiver:

At the time, Mr. Scherer owned 100 percent of the stock of Maples Health Care, Inc. (“Maples”) and West Virginia Health Care, Inc. (“WVHI”). (Id. at 10-11). Maples is an operating company that runs an assisted living care and skilled nursing home business in a facility that is owned by WVHI. Together, Maples and WVHI are Mr. Scherer’s most valuable assets.

So, we have an ancient liability the IRS has failed to collect using normal methods and an asset housing elderly residents the IRS does not want to put onto the street.  The perfect recipe for bringing in a receiver.

Continuing into the case the liability owed exceeds $5 million and the IRS had brought a suit to collect in 2014.  All the elements of huge liability that needs lots of attention, failed efforts to collect through normal administrative and judicial means coupled with the type of property at the core of the business causes the IRS to go to all of the trouble to find someone to serve as a receiver and to seek that person’s appointment.  The court goes through the IRS efforts.  It also recounts the resume of the person the IRS has identified to serve as the receiver.  Then it walks through why a simple sale of the property would not best serve the situation before it gets to the legal issues it must consider in making the decision to appoint a receiver.

The opinion lists the many duties, responsibilities, powers, authority and protections of the receiver.  Reading through the list provides a good idea of the complexity of these types of appointments.  Following that list of 28 items, the court lists the 11 terms and conditions of marketing and sale.  Then it lists additional duties of the trustee and the staff before ending with the notifications of violation of the terms and conditions of the order.  When a judge appoints a receiver, the judge knows that the case may create work for the judge for months or years to come.  The same is true for the government lawyers.

Here, there is a need to protect the value of the assets but also to protect a place where many people reside to keep the collection of taxes of the owner of the business from negatively impacting their lives.  These residents were not the problem and need to be consider in a solution.  These situations present complex collection challenges for the IRS.  I wish it well as it seeks to accomplish these dual roles in a challenging environment.  We don’t often think of the IRS as a nursing home operator or the operator of other types of special businesses but sometimes that’s what it takes to get the job done.

Sixth Circuit Holds that State Court Judge’s Failure To Pay Taxes Was Willful for Purposes of Bankruptcy Discharge Rule

Your bloggers have had lots on their plate this week, so we apologize for the lighter than usual coverage. Luckily, others, like Jack Townsend, who in addition to working with me to cover criminal tax in Saltzman and Book, has his own terrific blog, Federal Tax Crimes. Over there today he discusses United States v Helton, an unpublished Sixth Circuit opinion that addresses the exception for bankruptcy discharge in Bankruptcy Code Section 523(a)(1)(C) for a debt “with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax.”  

The issue in these cases turns on what is needed to prove willfulness. In 2014 guest poster Lavar Taylor discussed the Ninth Circuit’s approach in What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits, Part 1 and Part 2  

Helton involves a Georgia state court judge who prior to his time on the bench ran up some pretty significant income tax debts. At the same time the taxpayer often frequented restaurants, drove a Mercedes, and made sizable charitable contributions. The case turned on whether Helton voluntarily and intentionally violated the duty to pay taxes.  According to the Sixth Circuit (internal cites omitted), “[t]hat element is met when the taxpayer has the financial means to meet his outstanding tax liabilities but makes a conscious decision not to apply those monies toward his tax debt.”

The opinion concluded that Helton’s “discretionary spending—lavish when compared to the pittance he allocated toward his taxes—amply supported the district court’s finding that Helton’s violation of his duty to pay taxes was voluntary and intentional.”

As the Sixth Circuit discusses, the excuse from the taxpayer, that he was busy with work and occasionally depressed, was not enough to escape the finding that he intentionally violated his tax paying duty. It was not necessary for the court to conclude that his lifestyle spending was undertaken specifically to avoid paying taxes.

5th International Conference on Taxpayer Rights – Registration is Now Open

Sometimes, in the midst of all that is going on in one’s own professional life, it helps to take a step back and think about first principles of tax administration.  It is also fascinating to learn about tax administration in countries not your own – so that you look at your own tax system with new eyes, and think about how things might be done differently.  That is the underlying rationale of the International Conference on Taxpayer Rights, which I first convened as the National Taxpayer Advocate in 2015, and for which the Center for Taxpayer Rights has picked up the mantle.  So I’m pleased to announce that registration is now open for the 5th International Conference on Taxpayer Rights (ITRC), which will be held online.  You can check out the agenda and register for the conference here.

This year, the Center will convene not one, but two (!) conferences, because we had to move back a year the conference originally scheduled for 2020.  The first ITRC will be held on 26 to 28 May, 2021.  For each conference we try to focus our panels around a general theme, and the 5th ITRC theme is Quality Tax Audits and the Protection of Taxpayer Rights.  This theme will be explored in six panels over two days:

  • Foundational audit principles and applicable taxpayer rights;
  • The conduct of tax audits and the intersection of taxpayer rights: case studies;
  • Audits and taxpayer rights in an environment of cross-border cooperation;
  • Audit selection in the twenty-first century;
  • The impact if audits on future compliance; and
  • Criminal investigations and civil tax audits.
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The moderators and panelists represent 15 countries, and come from different disciplines and roles in tax administration.  We have members of the judiciary, tax agency governors, former commissioners and other agency personnel, tax professionals, and professors of tax, economics, psychology, and anthropology, as well as private practitioners and representatives of international organizations.  This is a cross-cultural and interdisciplinary group, and if past conferences are any indicator, the discussions will be fascinating.

New with this conference is a pre-conference Low Income Taxpayer Clinic Workshop on May 26, focusing on Representing Low Income and Small Business Taxpayers in the COVID-19 Economy.  International interest in clinics for low income and other underrepresented taxpayers has been growing over the years, with the movement expanding to Australia, UK, and Ireland.  Through this workshop, which is free, people can learn about starting an LITC in their country and learn about the work of existing LITCs.  We also plan to continue this workshop as part of future ITRCs, with different topics each year.  You can learn a bit about international LITCs by watching the Center’s Tax Chat! with several directors of LITCs from different countries.  Access the Tax Chat! here.  (By the way, subscribe to our YouTube channel so you can learn about future Tax Chats!)

Normally, we rotate holding the conference in a different part of the world each year, but of course the coronavirus pandemic threw a spanner in the works on that plan.  This year we planned to be in Athens, Greece, and we still have the National and Kapodistrian University of Athens School of Law as our host organization, but we will be holding the conference online.  The hours of the sessions each day are scheduled on Central European Summer Time, which might be early for Pacific Coast folks, but if you register and miss the first session, we will send you a link to the recording the same day so you can watch it then, albeit a bit out of order.

As I mentioned earlier, we plan to hold a second conference this year – the rescheduled 2020 conference.  The theme of the 6th International Conference on Taxpayer Rights is Taxpayer Rights, Human Rights: Issues for Developing Countries.  This will be a fascinating conference, and I am hopeful we all will be able to meet on October 6 and 7, 2021 at the University of Pretoria in South Africa.  You can see the agenda for the 6th ITRC here.  And if you’d like to get a bit of a preview of this conference, check out the Center’s Tax Chat! video with Riel Frantzen, Annet Oguttu, and Asha Ramgobin of the University of Pretoria here.

So.  Please take a look at the conference.  This is not your normal tax practice continuing education program.  It is a venue for thinking about how we might improve tax administration and enhance the protection of taxpayer rights.  It’s an opportunity to learn from other countries, other cultures, other tax administration.  I’ve learned so much from the conferences in the past.  I just wish we could meet in person in Athens!

Hope to “see” you online though – you can register for the conference here.

Sixth Circuit Weighs in On Sovereign Immunity and Exceptions to Notice in Third-Party Summons Case

When IRS issues a summons to third parties it generally has to notify the taxpayer whose records are identified. That right to notice is key, as it triggers a correlative right to bring an action in district court to challenge the summons and allows for limited judicial review of IRS’s vast information gathering powers.

It may come as a surprise that not all summonses the IRS issues result in notice to the taxpayer. Section 7609(c)(2) excludes five categories of summonses. I discuss this extensively in Chapter 13 of Saltzman and Book IRS Practice and Procedure. Gaetano v US, a recent Sixth Circuit case, discusses the nature of the exclusion and its relationship to subject matter jurisdiction, standing and sovereign immunity. It also highlights inconsistent approaches that courts have taken to characterizing the exceptions, and concludes that the 7609(c)(2) notice exceptions relate to the court’s underlying jurisdiction to hear challenges to the summons.

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Gaetano involves an IRS criminal tax investigation into the taxpayers’ Michigan-based cannabis dispensary business. IRS sought the records pertaining to the Gaetanos from Portal 42, a software company that provides the cannabis industry with point-of-sale systems. Those systems allow businesses to track customer sales data or delete the data remotely with a “kill switch.”

The opinion discusses how an IRS CID agent interviewed the owners of Portal 42 and then served a summons ordering that the owners “give testimony and produce various records “and other data relating to the tax liability or the collection of the tax liability or for the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws concerning [the Gaetanos] for the periods shown.”

The IRS did not notify the Gaetanos, but within two weeks of the service of the summons on Portal 42, the taxpayers filed a petition to quash, alleging that IRS should have given them notice and alleging that the summons was issued in bad faith.

The district court, adopting the magistrate judge’s key holding, dismissed the Gaetanos’ petition to quash, and concluded that they did not have standing under 7609(c)(2)(E).

The (E) exception to notice applies when the summons issued by an IRS criminal investigator in connection with an IRS criminal investigation and the summoned party is not a third-party recordkeeper. Portal 42 was not a third-party recordkeeper (that is statutorily defined in 7603(b)(2)).

There was a dispute about whether the summons was issued in connection a criminal investigation. The Gaetanos’ main argument was that the summons was deficient because it failed to specify the tax periods that the IRS was criminally investigating, but the opinion held that the statute only required that the summons identify the tax periods which IRS sought information.

The Sixth Circuit opinion affirms the district court but in so doing explores and clarifies the import of the five exceptions to notice in Section 7609(c)(2).  As the opinion notes, courts have viewed the exceptions as either “limitations on statutory standing or (as the Government argues) exceptions to [Section 7609’s] sovereign immunity waiver.”

The opinion nicely collects cases that have viewed the exceptions to notice as triggering standing limits or sovereign immunity waivers.

The lower court opinion, in dismissing the challenge for lack of subject matter jurisdiction, was not clear if the dismissal relied exclusively on standing or was also based on the sovereign immunity waiver. The Sixth Circuit viewed this issue as a matter of first impression, and while the result in this case did not hinge on the difference, the opinion discusses why the difference matters, including most importantly that 1) the government cannot waive sovereign immunity and 2) a court can bring that jurisdictional issue up at any stage of litigation.

As we have discussed numerous times, the Supreme Court’s case law on whether a statute confers jurisdictional status has evolved over time. As the opinion notes, the “Supreme Court, however, has cautioned that a statutory condition — even one attached to a waiver of the United States’ sovereign immunity — is not accorded jurisdictional status unless “Congress has ‘clearly state[d]’ as much.” United States v. Kwai Fun Wong, 575 U.S. 402, 409, 418-20 (2015) (citation omitted).

Gaetano analogizes the language in the 7609(c) exceptions as similar to the Federal Tort Claims Act, where the Court has found that the exceptions suspend the whole statute, leaving the “bar of sovereign immunity” and hence concluding that the (c)(2) exceptions are jurisdictional.

The opinion has one more wrinkle. While typically a plaintiff bears the burden of proving that there is a waiver of sovereign immunity, Gaetano holds that the government has the burden for establishing that the exception applies when the petition to quash is not facially within one of the exceptions:

The basic rationale for treating sovereign immunity exceptions as affirmative defenses is that a plaintiff should not be required to prove a negative for each enumerated exception, and the government will generally possess the relevant facts to prove that a particular exception does apply. 

That burden for the government is pretty low, and the CID agent’s affidavit was sufficient to connect the summons to a criminal investigation. That the CID agent may have not fully complied with the IRM (including specifying all time periods involved in the investigation) and “goes to the merits of whether a summons should be enforced or quashed. We cannot proceed to the Powell test when 7609 does not confer jurisdiction over this action.”

Does the Golsen Rule Apply to Tax Court Rules?

For many years the Tax Court did not concern itself with circuit court precedent in deciding cases and decided cases as it thought best.  The leading case for the Tax Court’s thinking on this issue was Lawrence v. Commissioner, 27 T.C. 713 (1957), decided based on the nationwide jurisdiction of the Tax Court and the desire for uniform application of federal tax laws, which caused the creation of Court almost a century ago:

One of the difficult problems which confronted the Tax Court, soon after it was created in 1926 as the Board of Tax Appeals, was what to do when an issue came before it again after a Court of Appeals had reversed its prior decision on that point. Clearly, it must thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, the obvious procedure is to follow the higher court. But if still of the opinion that its original result was right, a court of national jurisdiction to avoid confusion should follow its own honest beliefs until the Supreme Court decides the point. The Tax Court early concluded that it should decide all cases as it thought right.

The downside of that practice was that it forced petitioners or the IRS with favorable circuit court precedent to file an appeal and obtain an easy victory in the circuit court overturning the decision of the Tax Court.  Eventually, the Tax Court decided that making taxpayers and the IRS engage in a two-step process to reach an outcome already dictated by circuit precedent did not make sense and it announced a change in its practice in the case of Golsen v. Commissioner, 54 T.C. 742 (1970).  Reversing the Lawrence decision, the Tax Court held:

we think that we are in any event bound by Goldman since it was decided by the Court of Appeals for the same circuit within which the present case arises. In thus concluding that we must follow Goldman, we recognize the contrary thrust of the oft-criticized case of Arthur L. Lawrence, 27 T.C. 713. Notwithstanding a number of the considerations which originally led us to that decision, it is our best judgment that better judicial administration. requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.

Fifty years later the Tax Court still follows Golsen and even if the Tax Court has issued a precedential opinion on an issue, the Tax Court will follow the precedent of the circuit to which the case will be appealed.  For that reason, the place where the taxpayer resides at the time of filing the petition can have an outcome-changing impact.

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While the Tax Court has bowed to the will of circuits in the cases it decides, does or should the same recognition of authority apply to the rules it creates?  If the Tax Court has a rule that conflicts with circuit precedent, should the Tax Court follow the circuit precedent in writing its rules?  You might question how the Tax Court can write rules that reflect varying precedent among the circuits.  Certainly, writing a set of rules that vary based on circuit precedent would be challenging and in most rules unnecessary, but what about rules that apply to cases appealable to only one circuit?  If every case the Tax Court decides will go to one circuit, shouldn’t the rules of the Tax Court follow the law of the circuit rather than the position of the Tax Court?  Such a view of the rules would seem faithful to the precedent in Golsen.  It would also alert parties practicing before it of the law that would be applied in a given situation, rather than having a rule that could mislead practitioners or the 70% of petitioners who file pro se.

Tax Court Rule 13(c) provides:

Timely Petition Required: In all cases, the jurisdiction of the Court also depends on the timely filing of a petition.

The Court may not need a rule that states a legal conclusion, but if it has such a rule and if the Golsen rule applies to the Court’s rules, it would seem that Tax Court Rule 13(c) should recognize that in two of the types of cases it describes in Rule 13(b) the jurisdiction of the Court does not depend on timely filing.  Certainly, timely filing is very important but in whistleblower cases and in passport cases timely filing is not a jurisdictional prerequisite.  We have discussed the decisions in the D.C. Circuit on the jurisdictional issue, holding that timely filing is not a jurisdictional prerequisite here and here

Since the appeal of any whistleblower case or passport case from the Tax Court would go only to the D.C. Circuit under the catchall language at the end of IRC 7482(b)(1), it would seem that precedent from that circuit would control the outcome of a Tax Court case regarding jurisdiction under the Golsen rule.  If it would control the outcome of a Tax Court case in which the Court was writing an opinion, why wouldn’t the circuit court precedent also control the Tax Court rules?

Impact of Initial Exclusion from EIP of U.S. Citizens Filing Jointly with Non-Citizen Spouses

We welcome two students from the Georgia State University College of Law Philip C. Cook Low-Income Taxpayer Clinic as guest bloggers, Lauren Zenk and Lauren Heron, for a discussion of the latest developments in stimulus payment legislation as it relates to U.S. citizens who file jointly with non-citizens spouses. The Georgia State Clinic began working with the Harvard Clinic last October to file an Amicus Brief on behalf of the Center for Taxpayer Rights as the amicus. The Center sought to assist low-income taxpayers denied stimulus payments due to the non-citizen exclusion in the initial CARES Act legislation. This brief was mooted by the next round of legislation which provided: 1) U.S. Citizens who elect to file jointly with their non-citizen spouses can receive the stimulus payments for themselves and their eligible children, and 2) the value of the first stimulus payment can be issued as a credit on their 2020 tax return. Still, the initial eligibility exclusion that the clinics were preparing to argue against raises issues that may arise again in the future, and, should that occur, the authors thought that it would be useful to highlight the arguments they were preparing to make.  Keith

Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to respond to one of the worst public health crises this country has ever experienced. The CARES Act directed the Treasury Secretary to process the payments “as rapidly as possible.” 26 U.S.C. § 6428 (f)(3)(A). Initially excluded from these payments were most taxpayers without a Social Security Number (SSN), which the government argued included U.S. citizens with a SSN who elected to file jointly with their non-citizen spouse.  The result denied millions of American citizens, and their eligible children, benefits they desperately needed. Before the passage of the Omnibus Spending Bill in December of 2020, the U.S. citizens who were initially denied relief only had one identifiable remedy to receive the stimulus payment: file their 2020 tax return separately from their non-citizen spouse and receive the payment as a Recovery Rebate Credit.

However, this remedy would have been inadequate for two compelling reasons: First, filing MFS would cause them to lose favorable tax rates and certain credits available to low-income taxpayers; and second, they would have to wait until 2021 to receive the benefit of the payment during a period where the timeliness of relief was critical. The spending bill addressed the inadequacy of this remedy and provided that the U.S. citizens with non-citizen spouses and their families were “eligible individuals” for the credit. Still, only the U.S. citizen spouse and eligible children are counted for the credit, so these families are still receiving $600 less than similarly situated families. The spending bill also provided for retroactive payments for those families denied the first EIP under the Cares Act.

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The Statutory Ambiguity Question

Litigation was quickly brought to challenge the government’s interpretation in regard to the eligibility of U.S. citizen taxpayers married to non-citizen spouses.  The clinics were preparing to file an amicus brief that would argue against the government’s position that the CARES act excluded this class of U.S. citizens from eligibility.  The clinics approached their arguments from two perspectives: (1) demonstrating that the statutory language at issue was in fact ambiguous and should be read as including this class of taxpayers as being eligible for payments; and (2) specifically illustrating how the government’s interpretation would negatively impact low-income and economically vulnerable taxpayers and conflict the with the CARES Act’s legislative purpose.

The statutory interpretation argument focused specifically on the statutory language in 26 U.S.C. § 6428(g)(1)(B), which the government interpreted as requiring that married spouses filing jointly both have valid social security numbers in order for either to qualify for the stimulus payment.  This interpretation had the effect of punishing mixed-status families by denying American citizens and their eligible children the benefits they deserve.

Section 6428(a)(1) establishes that any individual with a SSN shall be allowed a $1,200 credit. Subsection (d) defines an “eligible individual” as any individual that is not a “nonresident alien individual,” a dependent, or “an estate or trust.” Therefore, any non-dependent with a SSN is plainly recognized as an eligible individual. Subsection (a)(1) states that “[i]n the case of an eligible individual, there shall be allowed as a credit . . . .an amount equal to the sum of . . . $1,200 ($2,400 in the case of eligible individuals filing a joint return).” The subsection’s parenthetical is limited to the narrow case of eligible individuals filing a joint return. The parenthetical does not encompass joint returns where a single party is an eligible individual, such as mixed-status filers. The SSN holder remains recognized as an eligible individual entitled to a credit of $1,200 under § 6428(a) for the purposes of emergency relief and economic stimulus.

Section 6428(g)(1) establishes the requirement that joint returns must include the SSNs of both spouses, but it is ambiguous whether this requirement applies to joint returns where only one spouse has a SSN. The provision states that, “No credit shall be allowed . . . to an eligible individual who does not include on the return of tax . . . (B) in the case of a joint return, the valid identification number of such individual’s spouse.” Subsection (B) presumes that the spouse on the joint return shall have an SSN. Therefore, it overlooks situations where one spouse simply does not have an SSN to provide. The language of section 6428(g)(1) may have been included as an administrative measure to ensure that all relevant information possessed by the tax filers is provided and to prevent $2,400 from going to a pair of an eligible and non-eligible individuals. The government’s reading of (g)(1) as establishing a circumstantial barrier preventing distribution of the payment is not the only possible reading of the section. Rather, the presence of an implicit waiver of subsection (g)(1)’s requirement to provide a spouse’s SSN on the joint return when a spouse does not possess an SSN is a valid interpretation of the passage.

At first blush, it appears that the government could successfully counter this argument by pointing out that the CARES Act expressly provided that members of the armed forces were exempted from the (1)(B) requirement that the other spouse provide a SSN where paragraph (1)(A) is satisfied, allowing these certain families to receive the full $2,400. The government would likely use this carve-out to argue that Congress knew how to make an exception and chose not to do so for the class of taxpayers at issue.  The military exemption does not fully clarify Section 6428(g)(1) as it applies to mixed-status filers. The CARES Act expressly exempts members of the armed forces from the requirements of (1)(B) when at least one spouse satisfies the requirements of paragraph (1)(A). The requirement of (1)(B) refers to joint returns, however, so this “Special Rule” allows military families to receive the $2,400. Section 6428 still ignores the possibility of an eligible individual, who is owed the $1,200 payment, but happens to file a joint return with an ineligible individual.

Courts must do their best, “bearing in mind the fundamental canon of construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme,” to enforce the meaning of the statute. Utility Air Regulatory Group, 573 U.S. at 320. When reading subsection (g)(1) in concert with the rest of § 6428, ambiguity is evident.

Why this Still Matters for Low-Income Taxpayers

Thankfully, Congress got around to clarifying the legislative language, which removed any ambiguity and included this class of taxpayers in the class of individuals eligible for economic impact payments.  Whether you call the legislative fix an eligibility extension or a correction ambiguous language, it is difficult to ignore that some families were wrongfully denied relief at the height of the pandemic. The relief given is better late than never, but it still undercuts the initial purpose of the Act. In March 2020, the Bureau of Labor Statistics reported the unemployment rate increased by .9 percent, up to 4.4 percent, which was the largest “over-the-month” increase since 1974.  This statistic reflects 1.4 million Americans who became unemployed as a result of the pandemic outbreak. For these families that may currently be facing unemployment, a tax credit retroactively issued in 2021 is almost without purpose. Further, a Pew Research Center Survey found that lower-income American’s were experiencing job loss at a higher share and that only about one-in-four of these individuals/families said they had funds set aside that could cover three months of expenses in the case of job loss.  While over 130 million individuals did receive stimulus payments, the requirement that both spouses have a social security number allowed otherwise eligible individuals and their eligible children to fall through the cracks at a time where financial assistance is greatly needed, especially by low-income, vulnerable populations.

Had the statutory language not been changed and had the government persisted with its interpretation of the original CARES Act language, the remedy the government proposed for these excluded U.S. citizens and their dependents originally would have been to file their 2020 tax return separately from their non-citizen spouse. This potential remedy, however, would have been insufficient, because it would have placed taxpayers in the position of having to forego other tax benefits in order to obtain the economic impact payments.  The Internal Revenue Code (IRC) incentivizes the MFJ filing status by providing that taxpayers filing separately will often have higher tax rates and will be ineligible for certain deductions, exemption amounts, and credits that are allowed to those filing jointly. These differences can be especially punitive when the taxpayers are low-income. Unfortunately for low-income taxpayers in particular, a married filing separately filing status will reduce or eliminate the impact of the following tax credits and deductions, which low-income taxpayers commonly use. These include the child tax credit, additional child tax credit, exclusion of a portion of Social Security benefits, credit for elderly and disabled, deduction for college tuition expenses, student loan interest deduction, and credits incentivizing investments in higher education like the American Opportunity Credit and Lifetime Learning Credit. In many circumstances, low-income taxpayers rely on these credits to supplement their income and lift them above the poverty threshold and being forced to relinquish these benefits to obtain economic impact payments would have not made economic sense, defeating the CARES Act’s stated purpose.

It is tempting to say that these arguments have only academic interest because all’s well that ends well.  However, we believe that it is important to present these arguments to the practitioner community because of how often this type of statutory language is used and is interpreted by the government to exclude U.S. citizens married to non-citizen spouses from critical government benefits.  For instance, this exclusion was not unique to the CARES Act. In the 2008 global financial crisis, Congress used similar statutory language that the government interpreted as giving tax rebates to most American taxpayers, except for spouses of non-citizens without social security numbers. It does not take much imagination to think that, in the coming years, similar language might once again be used in future stimulus bills.  Finally, this exclusion affects low-income taxpayers who would otherwise be eligible for the Earned Income Tax Credit (EITC). The EITC gives preference to spouses who elect to file MFJ, where both spouses have a valid SSN, and eligible children. These taxpayers are entitled to large refundable credits, sometimes up to around $7,000. However, it has been widely accepted, perhaps uncritically, that this credit is unavailable to U.S. citizens filing jointly with their non-citizen spouse.

Conclusion

In the absence of a judicial venue to raise these sorts of arguments, it is important to raise them for discussion so that policy makers can consider the unintended consequences of their legislation. Hopefully, in the future, Congress and the IRS will take these considerations into account on the front-end of legislation, so vulnerable taxpayers are not excluded from legislation intended to assist families in the midst of economic crises. However, if this type of language is once again used in stimulus payments, we encourage practitioners to not accept the government’s interpretation at face value, as there are sound interpretative arguments that can be made on behalf of these taxpayers who deserve to be included in these stimulus and anti-poverty efforts.

Lawyers, Coins and Dead Presidents: IRS Agent Seizes Valuable Coins and Taxpayer Sues for Conversion

Willis v Boyd, an opinion from the 8th Circuit Court of Appeals, is not a typical tax collection case. The opinion involves an IRS agent who seized 364,000 one dollar coins that were issued to commemorate US presidents. After seizing the coins, which were in special boxes in original packaging consisting of 1,000 coins, another IRS employee removed the coins from their packaging, put the coins through a coin counter, and deposited  $364,000 to be credited against the taxpayer’s sizeable liability. The taxpayer claimed that the coins had significantly greater value and sued the government under the Federal Tort Claims Act for conversion. After winning on the merits at the district court, the government appealed, claiming that the FTCA did not act to waive sovereign immunity. On appeal, the circuit court agreed with the government. 

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Sovereign immunity allows the government to escape suits unless there is a clear waiver. The FTCA waives sovereign immunity in suits seeking money damages against the federal government “for injury or loss of property . . . caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant.”

The waiver does not apply to all negligent actions, or wrongful acts or omissions. Under the statute the FTCA waiver does not apply when the government action is “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.”   

The Supreme Court, however, has held that not all discretionary actions trigger the exception to the waiver. Wanting to avoid courts second guessing policy choices, the Court has held the decision must be “of the kind that the discretionary function exception was designed to shield.”  What does that mean?  Even though for example there is discretion associated with driving, the government cannot escape litigation in all instances when an employee exercises some discretion; a government employee negligently operating a vehicle is different from an employee unreasonably exercising discretion in a way closely connected to policy choices related to the employee’s job.

To help determine which discretionary acts trigger an exception to the waiver, , the Supreme Court requires courts to employ a two-part analysis: 

  1. Whether the challenged conduct or omission is ‘truly discretionary'” in that “it involves an element of judgment or choice instead of being controlled by mandatory statutes or regulations.” 
  2. If the answer to the first question is yes, then courts consider whether the employee’s judgment or choice could be “based on considerations of social, economic, and political policy.” 

If the government employee’s discretionary choice or action is based on social, economic or political policy, then the exception applies, and the government will not be deemed to have waived its immunity.

Bringing that back to the coins led the 8th Circuit to explore IRM policy. As the opinion discusses, the IRM does contain guidance on the seizure of property that may be a collectible, but it fails to instruct IRS employees on how to determine whether the coins are in fact collectible. Here is what the IRM says:

“[D]omestic and foreign currency seized for forfeiture, except where it is . . . held as a ‘collectible asset,’ must be expeditiously counted, processed, and deposited . . . within 5 days of seizure.” See Internal Revenue Manual § 9.7.4.6.1(2).

It does not provide guidance or instructions on how to determine whether the coins are considered collectible:

[The IRM] never spells out when additional investigatory duties are triggered, or what an additional investigation might look like; rather, it apparently gives an agent discretion to determine whether seized currencies’ face value is a realistic estimate of its worth or whether an investigation into its value as a collectible asset is needed and what it might entail.

The IRM does provide additional guidance on what to do after an IRS employee determines that coins are collectible. But the absence of guidance on collectability is key, even if the facts suggested that the IRS employee should have done more –and it is easy to make the case that the coins placement in the collectors’ boxes should have led to some additional inquiry:

[W]e do not think, as just explained, that the manual required the agent to do more than he did when he categorized the coins. Even if the decision was carelessly made or was uninformed, the agent’s negligence in making it is irrelevant.

As to the second factor that needs to apply for the discretionary exception to apply the appeals court noted that the district court erred in applying a subjective test to the inquiry. In other words, it did not matter that the IRS employee failed to consider the policy choices; the key is “whether the decision in question is by its nature as an objective matter susceptible to policy analysis.” To that point, the opinion stated that “agents who seize currency must balance the competing interests of expeditious deposit on the one hand and preserving property on the other—a calculation that plainly involves questions of social, economic, and political policies.”

Conclusion

I find it hard to be too disappointed in the outcome. I did not dig into the details of the case history but I suspect the taxpayer had ample opportunity to pay the assessed liability. The failure of the taxpayer to sell the coins on her own dime was in her control. In addition, the seizure and application to the tax liability allows the taxpayer to escape the income tax liability associated with the coins’ inherent gain.  I also suspect that a cooperative taxpayer may have been more engaged with a revenue officer and may have had opportunity to let the RO know about the value and allow for the government to treat the coins as collectibles rather than just cash.

Update: The factual summary and original conclusion to the post, as some of the comments have noted, are off the mark. My failure to read the district court opinion contributed to some misstatements.

As commenter Michelle Wynn notes:

The District Court Decision made clear that Ms. Willis did not have any tax liability, the coins were seized while other law enforcement agencies were executing a search warrant for “papers and documents” related to non-tax crimes (though embezzlement can often lead to tax crimes relations), there appeared to be no justification for the seizure of the coins which were not covered by the warrant (though the District Court seemed to conclude that possible forfeiture was the only reasonable explanation), and the warrant was related to the Plaintiff’s ex-husband who did not reside at the residence. The “value of the coins” was later returned to the Plaintiff, but only for their face-value rather that what she believed to be their much higher collector’s value. However, because the Appeals Court found that sovereign immunity applied based upon the discretionary exception, it did not discuss any of the reasons that the initial seizure may have been inappropriate or any of the other arguments against sovereign immunity discussed in the District Court Decision. 

Innocent Spouse Updates

The 11th Circuit upheld the decision of the Tax Court in Sleeth v. Commissioner, — F.3d — 2021 WL 1049815 (11th Cir. 2021), holding that Ms. Sleeth was not an innocent spouse.  The Sleeth case continues the run of unsuccessful taxpayer appeals of innocent spouse cases following the major structural changes to the law in 1998.  Another taxpayer is trying to break the string by appealing the Tax Court decision in Jones v. Commissioner, TC Memo 2019-139 to the 9th Circuit.  I will discuss both cases below.

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Sleeth

The Sleeth case is the second case the Tax Clinic at the Legal Services Center of Harvard Law School appealed to a circuit court.  If you are interested in the oral argument, you can listen to it here.  Madeleine DeMeules argued on behalf of the clinic and did an excellent job but faced significant headwind from the court because of the burden that an appellant must meet to overcome a trial court decision.   

In both cases argued by the tax clinic the Tax Court found multiple positive factors and only one negative factor applying the tests of Rev. Proc. 2013-34.  Yet, despite the multitude of factors favoring relief in each case the Tax Court found that the knowledge factor was negative for the taxpayer and denied relief.  The pattern developing in these cases suggests that the Tax Court views the knowledge factor as a super factor, despite changes in IRS guidance no longer describing it as such.  In this post, Carl Smith discussed Seventh Circuit’s decision in the Jacobsen case, the first of the two cases the tax clinic took to a circuit court, and cites to all of the unsuccessful appeals of innocent spouse cases.

In Sleeth the court knocked down each of the three arguments for petitioner.  The appeal challenged the decision of the Tax Court regarding the knowledge element, the economic hardship element and the overall application of the factors.  Ms. Sleeth signed three joint returns at once, two of which were delinquent, showing liabilities totaling a few hundred thousand dollars.  She did not work, and her then-husband was a doctor who worked as a contractor rather than an employee.  In prior years he had also run significant liabilities which he had always paid off in relatively short order.  They had not filed delinquent returns before, so both the number of returns with an unpaid liability and the total amount of the liability exceeded prior circumstances.  She testified she expected he would pay off these liabilities, and he might have but he lost his job and ultimately paid in enough money to almost fully pay one of the years, but which still left a hefty balance.  The 11th Circuit found the Tax Court’s determination that she should have known he would not pay off the liabilities reasonable under the circumstances.

The size of the liability significantly exceeded her assets and her income was essentially non-existent.  The Tax Court found the economic hardship factor neutral, and the clinic argued on appeal it should be a positive factor for her, since devoting her assets to a partial payment of the liability would have left her homeless and penniless.  The 11th Circuit found that she might have had some assets other than her modest townhome, with which she could have paid a relatively small fraction of the outstanding liability. The court also foundthat she did not show she could not pay something toward the liability.  The Tax Court record regarding her assets and ability to pay was not as robust as it might have been.

Taking all factors into consideration and having agreed with the Tax Court on the two contested factors, the 11th Circuit did not find it unreasonable to deny Ms. Sleeth innocent spouse relief, even through the court had found three positive factors for relief and only one negative factor.  The case shows the importance of creating a strong record in the Tax Court and of prevailing at the Tax Court.  Overturning a primarily factual decision will never be easy.

Jones

Despite the difficulty in obtaining a reversal on an innocent spouse decision, Ms. Jones seeks to do exactly that in the 9th Circuit.  The Jones case involves not only a determination of her status as an innocent spouse but also the issue of whether she filed a joint return.  The tax clinic recently filed an amicus brief in the case on the issue of tacit consent.  We have not written much on tacit consent, but it is a regular feature in innocent spouse cases where one spouse, almost always the same spouse arguing for innocent spouse status, asserts that they did not agree to sign the joint return.  In many cases the spouse’s actual signature is not on the return, because the return was filed electronically or because the other spouse signed for both.  The Tax Court has created a body of case law deciding when the non-signing spouse intended the joint filing of a return and refers to the taxpayer’s consent in these situations as tacit consent.

Some of the factors the court relies upon in deciding whether a non-signing spouse intended to create a joint return are (1) whether the non-signing spouse objected to the filing of a joint return; (2) whether prior filing history of the couple during the marriage suggests an intent; (3) whether the non-signing spouse filed a separate return if that spouse had a filing requirement; (4) whether general reliance on one spouse for financial matters existed and (5) whether the couple had specific rules between themselves governing signing for one another.  While the issue of abuse and duress goes beyond tacit consent, it can play a role here.  If one spouse physically or emotionally intimidates or abuses the other, it could invalidate even an actual signature or could influence a court’s decision on the granting of tacit consent.

Taxpayer’s contesting a joint return liability should always look first to determine if they have an argument that no joint return exists.  Knocking out the existence of the joint return provides a surefire way of avoiding any liability stemming from the spouse’s income or other tax issues (note however that this does not hold true in a community property state, where the innocent spouse will still be required to include their share). Taxpayers can easily argue that they did not sign a joint return but face a much more difficult argument regarding their intent.  Bob Nadler wrote a post on the joint return issue several years ago in which he touched on tacit consent but the case did not focus on this issue.  Bob wrote the book on innocent spouse issues.  Christine Speidel and Audrey Patten are in the process of updating the book and the third edition should go to press later this year. 

Ms. Jones argues she did not intend to file a joint return and that if she did file a joint return, she should receive innocent spouse relief.  She is being represented by Lavar Taylor, a frequent guest blogger.  The case is still in the briefing stage and will not get argued until later this year.  Perhaps Ms. Jones can break the string of taxpayer defeats in appellate courts on the innocent spouse issue or avoid the innocent spouse issue altogether with a victory on tacit consent.  For those interested in innocent spouse issues, the case is worth following.